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Cotton growers who used Australian dollar (AUD) cotton swaps to hedge for the current season are enjoying the dual benefits of being free from a physical delivery contract in a tough season and realising a gain on the hedge position of around $100 a bale. An analysis of National Australia Bank cotton clients' hedging programs for the 2003/04 season found many growers were able to hedge successfully against the rising Australian dollar. The National was selling July 2004 cotton swaps in September and October 2003 for an average of $550 a bale. "With the swap market slipping back to around AUD$450 a bale as the result of a stronger dollar, growers have closed their hedge positions to realise a gain on the hedge of around $100 a bale to offset the fall in the physical price," the National's Head of Agribusiness Risk Management Services Tim Keith said. "Some of these growers took out hedge positions on cotton that was planted but due to low rainfall or irrigation water availability could not be grown through to harvest.
Because of the flexibility of National cotton swaps, growers have been able to close their positions at a gain that will offset the fall in the physical market price. Those who have received recent rainfall will hold these positions through to maturity.
"Growers using the National's AUD cotton swap were not only protecting themselves against adverse movements in the cotton markets but were also covered against currency changes. "While some growers were able to realise a gain on their hedges this season, the major benefit of swaps for growers is the ability to lock in prices that help to protect their profitability, rather than looking for short term advantages over the current market price. "The swap gives growers the capacity to lock in commodity prices for up to 3 years in advance without having to make a commitment to a particular trader," Mr Keith said. The National AUD cotton swaps are hedge contracts in Australian dollars that allow growers to sell cotton at a preset price for a certain date. Growers can settle their swap at any time during the contract period.
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